Beijing’s credibility is being put to test again, now that the city of Chongqing appears on the verge of pioneering a groundbreaking real estate tax as a fresh weapon to tackle China’s stubborn property inflation.

According to the Xinhua News Agency on Sunday, the northwestern metropolis is finalizing plans for levying the new tax on high-end residential real estate. The mayor of Chongqing, Huang Qifan, has recommended approval of the tax by the municipal legislature, and the Ministry of Finance has approved the tax in principle. Xinhua said the city could start collecting it by the end of March.
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The moment the news emerged, it has produced not only a hot debate but also considerable suspicion, including some of the more outspoken local media.

The adoption of the so-called real estate tax, which has been mulled and touted by Beijing for months, should in theory benefit China’s long-overdue effort to regulate its wayward property market with more internationally accepted methods and clean up some of its persistent fiscal anomalies and inefficiencies.

The argument for the tax: The authorities can now stop the local governments from relying heavily on land sales for their income and introduce a more steady and sustainable revenue stream. After all, record-breaking land sale prices are the root cause of the country’s severe property bubble.

But as with many other policy initiatives, China’s cynical citizens are questioning the motives behind the move.

The usually more liberal Beijing News ran a fairly blunt and eye-catching editorial yesterday with the following headline: “Don’t Hurt The Middle Class With The Real Estate Tax”

“The middle class doesn’t possess the financial power of the wealthy but can’t enjoy the cheap public housing at the same time. They constitute the main force of commercialized property consumption and they are therefore the main victims of high housing prices,” wrote the Beijing News.

“If the real estate tax is targeting high property prices, then the middle class should be the last group of consumers to be hit,” it added.

The fear and cycnism stems from growing suspicion that while such a tax will do little to rein in property prices, Beijing will effectively end up helping local governments acquire a new source of income at a time when windfall gains from land sales are looking less sustainable and drawing increased public dissatisfaction.

“The local governments will use the real estate tax to make up for their reduced income from dwindling land sales… This kind of suspicion isn’t without good reasons. The tax is levied on high-end properties but who can guarantee it won’t be applied to mid-tier houses?” the newspaper asked.

With property prices barely changed after a whole year even after two rounds of policy changes meant to reign them in, there’s widespread disillusionment with the government’s ability to deliver its long-held promise of tidying up the sector. The proposed real estate tax is supposed to take the lead in a third round of policy changes but things aren’t looking good even before it becomes a reality.